On June 19, 2007, the Office of the Inspector General of the Department of Health and Human Services (the "OIG") released an advisory opinion (the "Opinion") that provides guidance regarding whether the purchase by a hospital of an ownership interest in a physician-owned ambulatory surgery center ("ASC") complies with the federal Anti-Kickback Statute (Section 1128B of the Social Security Act). The Anti-Kickback Statute generally prohibits the knowing and willful payment, or the solicitation or receipt, of any remuneration (including any kickback, bribe or rebate) to induce a person to make referrals for services that may be covered by a federal health care program. A violation of the Anti-Kickback Statute is a felony, punishable by imprisonment and fines and can also result in exclusion from participation in federal health care programs. Additional civil monetary penalties of up to $50,000 per kickback and three times the amount of the illegal remuneration paid or received may also apply.

The Facts

The Opinion considers a freestanding multi-specialty ASC owned by a limited liability company (the "Company"), all of whose members were physicians: three orthopedic surgeons, two gastroenterologists and two anesthesiologists (the "Physician Investors"). Approximately 94% of the ownership interests in the Company were owned by the orthopedic surgeons, who founded the Company. Only the Physician Investors provided professional services to patients at the Company's ASC.

A general acute care tax-exempt nonprofit hospital located in the same area as the ASC (the "Hospital") proposed to purchase a 40% equity interest in the Company from the orthopedic surgeon Physician Investors (but not the other Physician Investors) for a fair market value purchase price. This purchase price would have exceeded the amount originally invested by the orthopedic surgeons for a comparable percentage ownership interest.

The Hospital was in a position to make or influence referrals, directly or indirectly, to the ASC or the Physician Investors. However, the Hospital would have agreed to take the following steps to limit its ability to make such referrals:

  • Any physicians employed by the Hospital would be prohibited from making referrals to the ASC.

  • The Hospital would not require or encourage its medical staff to refer patients to the ASC or to any Physician Investor.

  • The Hospital would not track such referrals.

  • Compensation paid to the Hospital's physicians would be consistent with fair market value in arm's-length transactions and would not be related, directly or indirectly, to the value or volume of referrals to the ASC or the Physician Investors.

  • The Hospital would notify its medical staff of the above measures.

  • The Hospital would continue to operate its own outpatient facilities for ambulatory surgery procedures.

Although the OIG has issued "safe harbor" regulations that immunize investments in ASCs that meet certain requirements, the facts in this case did not meet all of the requirements of the ASC safe harbor, and therefore the transaction was subject to the standard Anti-Kickback Statute analysis.

The OIG's Opinion

The OIG presents this Opinion in cautious terms, declining to conclude that the proposed purchase of an ownership interest in the ASC by the Hospital was "not related, at least in part, to referrals of Federal health care program business." Because of the possible link to the Hospital referrals, the proposed transaction "posed a heightened risk of fraud and abuse." In reaching this conclusion, the OIG highlighted the following problematic aspects of the transaction:

  • Because the Hospital proposed to purchase an interest from the orthopedic surgeon Physician Investors, rather than from the Company itself, the funds to be invested by the Hospital would not be used to expand or enhance the ASC or fund its operations. Therefore, the Hospital's investment would merely permit the orthopedic surgeons to realize a gain on their original investment in the Company.

  • Only the orthopedic surgeon Physician Investors were to sell a portion of their ownership interests to the Hospital, and the sale would be made at "an appreciated price." Thus, one purpose of the Hospital's investment could have been "to reward or influence" physicians "whose referrals of patients to the Hospital or to the ASC itself may be particularly valuable."

  • The return on the original investments made by the Physician Investors and the Hospital would not be directly proportional to the amount of the capital invested by each investor. (Because the Hospital would pay proportionally more for its ownership interest in the Company than the orthopedic surgeons paid for their interests, the orthopedic surgeons would receive a higher rate of return on their investments.)

The OIG was careful to note that none of these factors, alone or in combination, necessarily indicated fraud or abuse. However, given the limited facts it had been presented, the OIG could not conclude that the financial gain to the orthopedic surgeon Physician Investors was not related to the value or volume of referrals by the selling orthopedic surgeons to the Hospital or the ASC.

Guidance

The tone of the Opinion reflects the OIG's unease with hospital/physician joint ventures in general. This topic has been the subject of governmental scrutiny for several years, and still appears to be a focus of regulatory agencies' attention. An interesting aspect of the Opinion is the paradox created by the Hospital's proposed purchase of an ownership interest in the Company at a fair market value purchase price. A fair market value price would ordinarily be considered mandatory by health care lawyers, but here it created a situation in which the Hospital's return on its investment would be less than the return on the investment that could be realized by the Physician Investors (who had invested earlier at a lower price), causing the OIG to find fault with the transaction.

For practical purposes, it appears that any transaction in which a hospital purchases an interest in a physician-owned ASC must be structured so that the hospital either purchases its ownership interest on a pro rata basis from each of the existing physician owners or, preferably, invests directly in the ASC. Investing in the ASC, in particular, should address the OIG's concern with a hospital providing a "cash out" for physicians who are in a position to refer patients to the hospital. When ownership is purchased directly from physician investors, merely setting the hospital's purchase price at fair market value will not likely be enough to convince the OIG that the transaction does not involve a violation of the Anti-Kickback Statute. Thus, it is preferable for a hospital to be involved in any joint venture with physicians at the inception of the joint venture, rather than purchasing an interest in the joint venture at a later date.

Finally, this Opinion does not call for the prohibition of hospital-physician joint ventures. The OIG was unwilling to declare that this transaction did not involve fraud and abuse, but did not rule out the possibility that the transaction would be legal. It is possible that if presented with additional facts, such as whether particular physicians were more favorably treated by the hospital because of their referrals, the OIG could have issued a favorable opinion on the transaction. In addition, the Anti-Kickback Statute is an intent-based law (i.e., one must intend to violate the law in order to be found guilty of an offense); therefore, any final determination as to the legality of this arrangement, or a similar arrangement, would require an analysis of the parties' intent on a case-by-case basis. Nevertheless, the Opinion is another reminder that hospital-physician joint ventures and related transactions must be structured carefully to avoid Anti-Kickback Statute liability.

For more information regarding this topic, please contact Matthew C. Jones, any other member of the Health Law Practice Group or the attorney in the firm with whom you are regularly in contact.

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